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Analytics, cheaper technology help risk managers with strategic planning

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Analytics, cheaper technology help risk managers with strategic planning

As they look to link risk management to their organizations' strategic planning, risk managers are increasingly finding various analytical tools and techniques that help them make better decisions and reduce loss costs.

Better and less expensive technology, along with the fact that companies already use some of the analytical tools in such “top-line” areas as sales, marketing and product development, make adopting the approaches to risk management an easier sell, experts say.

“The technology gets more democratized. More and more people can use it,” said Edward S. Koral, specialist leader at Deloitte Consulting L.L.P. in New York. “This was the sort of thing that really required a lot of scale until recently.”

For example, applying predictive analytics to claims activity had been done only by insurers, but in the past two or three years some large self-insured organizations have begun using the technique, Mr. Koral said. “The cost of developing the model has gone from a million dollars or more to a quarter of a million dollars or less,” he said.

“There's also more wide-scale acceptance of predictive analytics as a business tool,” Mr. Koral said. “They're probably already doing it in other aspects of their business. If the organization has already cast their lot with predictive analytics ... there's a corporate culture that supports it, understands it (and) understands that it's good.”

Carol A. Fox, director of the strategic and enterprise risk practice for the Risk & Insurance Management Society Inc. in New York, said she sees the analytical tools being particularly useful as risk managers seek to analyze a range of possible outcomes in their strategic risk management efforts.

“I think risk professionals are looking for tools that can enable them to look at more of the economics of the risk,” Ms. Fox said. “Rather than looking at risk as a single point, look at risk as a range of potential outcomes, then how do my analytics help support that?”

Mark Moreland, executive vice president for strategic consulting at Lockton Cos. L.L.C. in Kansas City, Mo., said providing analytical tools has become an important part of what the broker brings to its clients. Lockton wants to be able to identify details clients might otherwise miss in the data and help them recognize opportunities and reduce costs.

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With strategic risk management, “The larger the company, the more intertwined that is,” Mr. Moreland said. “You're kind of aligning the risk management decision-making with the overall decision-making.

“So we're really focused on making sure, first of all, that our clients' strategies are aligned with their risk management strategies and that their risk management strategies are aligned with their corporate strategies,” he said.

Among other things, Lockton has devised a proprietary modeling technique called dynamic capital modeling, Mr. Moreland said.

“At the heart of that is that insurance is a form of capital,” he said. The tool helps organizations determine whether it's cheaper to use insurance or their own capital to finance risk, and it has been particularly helpful in addressing questions of limit adequacy and determining the probability that losses will exceed certain limit levels, Mr. Moreland said.

Linda Conrad, director of strategic business risk for Zurich Global Corporate at Zurich Insurance Group Ltd. in New York, said her company uses a technique called total risk profiling in its own strategic risk decision-making.

“It's something that Zurich has used for well over 10 years now,” she said. “It's basically an organized brainstorming or risk identification session.”

The company uses the technique more than 200 times a year, Ms. Conrad said, applying it to “pretty much anything we do: How does our risk landscape change based on this proposed solution or project?” The approach helps the company increase the likelihood of success of an undertaking and promotes increased communication and collaboration on risks.

Eric Jones, manager of FM Global's business risk consulting group in Dallas, said there's great value in the analytical tools, though he sees flaws in the way some organizations are using them.

“We provide the analytical tools that companies need and the analytical tools that companies use to objectively measure risk,” he said. “We really help clients by providing them with financial models and analytical tools to help them analyze risk.”

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“I do see analytics being used more and more. But the usage of these things is still too limited, and even when they are used, there's too much subjectivity involved in them,” Mr. Jones said. “Even when analytics are used, often there's flawed data used in those analytics.”

Ms. Fox agreed that it's important to look at the right data when using analytical tools in strategic risk management.

“Because of the vast information and data, how do you scrape that data and then use it in a way that actually informs?” she said.

While some companies might not yet be using the tools as effectively as they could, using analytics in risk management decision-making is becoming essential, Mr. Moreland said.

“Analytics is the future, and to get to that next level of thinking and the next level of decision-making — to focus on the right things — I can't overstate that,” he said. “Because in the absence of that, all you're doing is wasting time on things that might not have the right payoff.”

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